BP’s 2Q’18 Profits Quadruple Backed By Improved Upstream Operations & Rosneft Earnings

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Similar to its US competitors – Exxon Mobil and Chevron, BP Plc. (NYSE:BP), the European integrated energy company, posted a strong improvement in its June quarter performance. The solid performance was driven by a notable improvement in its price realization and refining margins. However, the highlight of the earnings release was the announcement of the acquisition of BHP’s US onshore assets, which will provide the company access to high quality assets in the Permian-Delaware, Eagle Ford, and Haynesville basins. Since these are low cost-high margin unconventional plays, this deal is likely to be accretive to the company’s earnings and cash flow and drive its value in the coming years.

We have a price estimate of $50 per share for BP’s stock, which is higher than its current market price. View our interactive dashboard: Higher Price Realizations & Production To Augment BP’s 2Q’18 Results and modify the key drivers to see the impact on the company’s valuation.

Key Highlights of 2Q’18 Results

  • BP’s upstream revenue rose to $12.7 billion, more than 20% higher compared to the same quarter of last year. This growth was driven by improved price realizations and higher production during the quarter. The company’s upstream earnings increased to $3.5 billion, as opposed $710 million in the year ago quarter, marking its strongest quarter since 3Q’14.
  • BP’s Downstream earnings stood at $1.5 billion driven by growth across fuels and in new retail markets. Profits from Rosneft rose sharply to $766 million from $276 million last year. As a result, the company’s 2Q’18 profit quadrupled to $2.8 billion during the quarter.
  • The company generated underlying cash flows (excluding oil spill expenses) of $12.4 billion in the first half of 2018, which covered for its organic capital expenditure and dividend payments. Given the improving commodity prices and robust pipeline of projects, BP announced a 2.5% increase in its quarterly dividend. The company will now pay a quarterly dividend of 10.25 cents per ordinary share, or 61.5 cents per ADS.
  • Recently, BP has agreed to buy a portfolio of US unconventional oil and gas assets from BHP. The deal is expected to give BP access to the liquids-rich Permian-Delaware basin, as well as premium positions in the Eagle Ford and Haynesville basins. The deal will add over 4.6 billion barrels of oil equivalent of high quality resources that will have the potential to drive BP’s value going forward. The company expects the deal to be accretive to its earnings and cash flow per share and contribute an additional $1 billion to upstream pre-tax free cash flow by 2021.

Going Forward

  • BP has started three major upstream projects year-to-date, under budget and on or ahead of schedule. It aims to begin production from three other projects in 2018 and has made final investment decisions on five projects in Oman, India, the North Sea, and Angola. These projects will enable the company to add 900 thousand barrels per day of incremental production by 2021 and drive its value in the long term.
  • Further, BP has made a series of investments in the broader advanced mobility space to achieve its lower carbon footprint targets. For this, the company invested in Freewire (developer of fast-charging technology), StoreDot (leading developer of ultra-fast charging battery technology), and Chargemaster (the UK’s largest electric vehicle charging network operator) in the first half of the year. These investments will enable the company to position itself  effectively in the fast-evolving electric vehicle market, while meeting its carbon emission targets.
  • Additionally, BP will continue to focus on its market led growth strategy for downstream operations, particularly in its fuels marketing business. The company will further expand its presence in major growth markets such as China and Mexico where it can offer differentiated high quality products and services to its customers.
  • BP plans to maintain a tight organic capital spending budget of $15-17 billion over the medium-term, and gearing ratio within the range of 20-30%. For 2018, the company expects to spend $15 billion in capital investments and generate $3 billion from its divestment program (excluding BHP deal).

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